In The Lead – Your Mutti Should Know

by Jon Nadler, Kitco Metals Inc. on July 25, 2012 · 0 comments

Precious Metals CommentaryWednesday morning trading action lifted the precious metals a tad higher as speculators figured that the latest batch of economic data from the US, China, Germany, and the UK would convince one or more of the central banks involved to take stimulative monetary action sooner rather than later.

Such expectations yielded a bit of profit-taking in the US dollar and propped up metals prices to a certain extent, especially in gold and in platinum. Constructive (for the euro) comments by the ECB added to the buoyant sentiment among speculators this morning as well.

Spot gold opened with a gain of 1% just above the $1,595 level and platinum advanced $18 to more than erase Tuesday’s losses. It still however traded just shy of the $1,400 mark on the bid-side. Silver climbed 20 cents to $27.16 and palladium rose $5 to $566 the ounce. Yesterday, the iShares silver ETF experienced its largest outflow of metal in three weeks with a loss of nearly 70 tonnes.

Meanwhile, trade data from China revealed a 23.6% decline in year-on-year silver imports. The figures also indicated a 29.6% fall in palladium intake and a near 32% gain in platinum inflows into that country. CNBC reported that holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust dropped for a fourth consecutive week after a 2.4 metric ton outflow on Friday, down by 15 metric tonnes; their biggest weekly decline since late December.

Yet another range-bound and sideways action-defined trading session took place on Tuesday following Monday’s declines in gold and the rest of the members of the precious metals’ group. Gold has now traded inside of a $50 range in an orbit around the $1,600 pivot point for circa ten weeks. Spot gold meandered between $1,567 and $1,587 and finished the day with a modest, $4 per ounce gain. Silver, platinum, and palladium, on the other hand all closed lower on Tuesday as continuing demand anxieties and persistent selling took their toll. The white metal ended at $26.96 the ounce, down one dime, while the noble metals were bid at $1,381 (down $13) and at $561 (down $8) respectively at the close of spot dealings in New York.

Reuters reported that gold remained under its 2012 starting level and that "investment buying and Indian and Chinese physical precious metals demand remained weak. Shanghai Gold Exchange volumes remain 30% under previous average levels. Physical gold demand is under pressure as a near-record low in the Indian rupee makes gold more expensive for Indian buyers which is among the top consumers of bullion. Holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, dropped for a fourth consecutive week after a 2.4-tonne outflow on Friday. The 15-tonne decline marked its biggest weekly fall since late December 2011."

CPM Group New York analysts opine that there could be a number of geopolitical and/or economic events in the making — whether in Europe, or the Middle East, or the USA — which could propel gold prices to higher levels in coming months.

However, the firm estimates that such moves might well stall out above $1,730 and that $2K gold is not likely in the cards owing to the fact that "gold market investors have shown reduced proclivity to race into the gold market as buyers when things like these (emerged) in the past nine months," and that as things stand currently, the market is already pricing in a good portion of such risks.

One of those risks pertains to China despite yesterday’s flash HSBC reading in manufacturing activity. The IMF said that the country may hold off on monetary stimulus because it has already put into motion a series of steps aimed at supporting better economic growth levels. However, the IMF did not shy away from pointing out the fact that serious risks remain on the radar for China and that

"while China’s economy seems to be undergoing a soft landing, achieving that is a key challenge. China is well placed to respond forcefully, if needed, to a deterioration of the external environment, in particular through fiscal policy, but the pace of activity has slowed and downside risks are significant."

Once again, on Tuesday, the US dollar drew the strongest bids by managing to vault to above the 84.00 pivot point on the trade-weighted index and by pulling off a 0.35% advance on the day. By contrast, the euro looked poised to breach the key $1.20 level. Not that many months ago, projections of a $1.20 euro elicited raised eyebrows from the recipients of bearish forecasts. Of course, now, the talk of $1.10 and parity has intensified quite a bit, despite the potential for counter-trend rallies and/or a pause in the multi-month slide in the common currency. Next week’s Fed meeting could provide an opportunity for such rebounds but FX technicians remain resolutely bearish on the euro.

Such bearishness is being bolstered by on-going trouble in the eurozone and the rising possibility that the crisis in that part of the world could spread into something a lot more serious and widespread (at least in the opinion of some dark lens-wearing writers). Yesterday’s drop in the common currency to two-year lows was precipitated by lower-than-anticipated German and French manufacturing data and by a fresh serving of altered outlooks by Moody’s. The ratings firm lowered its views on Germany, the Netherlands and on Luxembourg while warning that the strongest nations in the EU had better prep to have to offer life-support jackets to fast-sinking in debt Spain and/or Italy.

This latest round of "Moody’s (Outlook) Blues" was greeted with some quite vocal opposition be the recipients of the soured report cards. Stopping just short of not acknowledging the downgrades as legitimate, several EU officials quickly jumped in front of the nearest microphones and vigorously defended their efforts to keep the eurozone stable and viable. At this point, some are waiting for the other rating "shoe" to drop. S&P, which has had a AAA "stable" rating on Germany since late 1983 (!) has for now not commented on whether or not it will emulate Moody’s.

There are, however, other side-effects possible from such changes in ratings agency views. While no one anticipates a rise in Germany’s borrowing costs as a result of yesterday’s decision by Moody’s, the change in outlook could result in Ms. Merkel’s crisis combat strategies hitting some roadblocks. A round-up of some recent press clippings (of the German variety) speaks volumes (at high decibels, to boot):

On the 20th of July, the influential German periodical Der Spiegel’s headline read:

"Merkel Is Driving Europe into the Abyss."

The Frankfurter Allgemeine Zeitung lamented about the string of seemingly endless bailouts as follows:

"Today Spain and soon Italy it said. How long will German taxpayers put up with paying for the faulty speculation of banks?"

Then, the Suddeutsche Zeitung estimated the social calm in Spain as being no better than "fragile."

It noted that "people are outraged for good reason. There isn’t a single institution of public life that hasn’t been hit by a major crisis of confidence. Hope is now a rare commodity."

Further, Die Tageszeitung leveled the accusation that:

"Eurozone leaders have no one to blame but themselves." Finally, Die Welt remarked that "political majorities contradict popular sentiment. Euro-skeptics aren’t visible in parliaments. Saving the [common] currency appears to be an elite project." It then warned that "Germany’s next election may be the last time that a clear majority supports European solidarity."

Perhaps, in addition to the Moody’s slap in the face, these were the additional reasons that we heard The Iron Frau who goes by the endearing nickname of "Mutti" so strongly reiterating the fact that she continues to see Germany as remaining the safe-haven for the rest of the region while the crisis rages on. As The Beatles would say, she should know; she was on the job for 24 months already, before the global crisis began boiling over in late 2007.

Until Friday,

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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